Time to bite the bullet: 1. Create enforceable budget limits - Maastricht criteria with teeth. 2. Immediately default on all debt, writing down to a sustainable debt % of GDP. 3. Give the ECB the power, and the orders, to adopt Euro QE, and act as lender of last resort in the upcoming European banking crisis.
The debt service cost on thier accrued debt increased dramatically as they roll over debt...even at the planned subsidized rates. They can't reduce 'burn' at rates above 5% even if the planned 'austerity' is implemented. At the same time the chaos destroys tourism income and interrupts even the grey and black market economies. Much of the revenue flow is against government jobs in a recycling flow so that is reducing. The country has been in recessioin for three years, each year GDP declines by something like 5%...that is a continuing projection for the coming year. In that context government revenue collapses even though government spending contracts. Since GDP is the denominator in the Debt/GDP ratio the result is a rising Debt/GDP ratio and an increased nominal deficit. You notice they knew this in thier projections. This should show you that the plans to increase debt in order to 'buy time' for some magical thinking unarticulated future growth trend that can pay it all back cannot work. The private bank writedowns of existing debt that has been previously carried as Tier 1 capital with no reserve and accounted based on historic purchase price, is putting the banks that hold PIIGS debt into regulatory solvency distress and convincing all private investors, including Asians, to sell thier EU Sovereign debt holdings and stop buying new debt, leaving the ECB and the EFSF as they only buyer. They don't have the means to buy enough of the debt to keep interest rates from rising across the whold EU sovereign credit spectrum outside of Germany.
Well stated. Just look at when this thread started..8/19/11. Three months later, an assortment of proposals to simply "buy time" and now the contagion has spread to other countries. Bureaucrats absolutely hate making the hard choices, it always carries the weight of potential career suicide. So much easier to simply say they will do something as opposed to actually doing a damn thing. Meanwhile, we have our resident shills and mouthpieces that continue to echo these empty promises and project some mythical "return to growth". Comical.
Huh? I thought you weren't a fan of bureaucrats (like Bernanke) making hard choices, e.g. deciding to do more QE? I don't disagree, but would you applaud if the ECB decides to buy unlimited amounts of periphery debt tomorrow? That's a pretty hard choice...
I'm not a fan of bureaucrats, but you've misconstrued what I wrote above. By "hard choices", I'm referring to structural reforms that would address the underlying issues for excessive "borrow and spend". More specifically, the whole debacle we witnessed this past August whereby both sides of the aisle (politically) could not come up with a damn thing to cut because it would mean political suicide. In Europe, the problems are similar in scope, i.e. the banks are loaded with what is quickly becoming "toxic" debt and need their political cronies to figure out a way to "solve" this mess. Certainly, the US banking exposure can be partly attributed to ZIRP and a need to "chase yield" in whatever form they can get it. But back to what you said about the ECB...no, I don't think it's responsible to buy unlimited amounts of periphery debt. The structural issues with the Eurozone are to blame, that much is clear. At this point, I don't see a fix long term. The political rhetoric and endless "rumors" are just a means to buy time and presumably assist the banks in shoring up their exposure.
With appologies to Humpty Dumpty, 'All the Burgomasters in Brussels and all the Burgomasters Technocrat men could't put a debt bandaid on all that debt again.' The debt egg is broken. You cannot solve a debt problem with debt; it requires income. That is an unexcapable truth. Conceptually Europe is confused about what its problem is. The Burgomasters think they have debt problem and they think they are proscribing a policy of austerity that allow more debt to solve the current debt problem. This is all backward and confused. Properly considered Europe has 'growth problem.' Properly understood 'austerity' is not a strategy; it is a result of a failure to grow when you have excess debt. Austerity is a strategy of contraction that can only lead to default on excess debt. Europe, like the U.S., has had too much debt for decades, but now the debt appears to be a problem becuase there is no growth. Look at a graph of German and Italian GDP going back (GDP is a rotten growth metric but I use it here just for simple argument illustration) 50 years...you will see that Germany had a higher annual GDP than Italy did but you will notice that they were correlated...when one went up and when one went down; so did the other. This correlation of relative slow growth changes when the EMU is formed. German GDP continues to increase at a higher level and Italian GDP goes flat. That is why Italy is now in crises. They stopped growing, but they continued to borrow and now they can't borrow any more at rates they can afford because creditors expect that they well no be able to grow and that they will infact move quickly into negative GDP in the near term. If you get what the problem is you would approach a new EU treaty in an entirely different way. You would focus fiscal harmonization under strategy of common area growth. Merkel and Sarkozy are looking for fiscal harmonization of austerity, which is to say a strategy of contraction and eventual default, that should be understood for what it is. Someone, please send this to Wolf at the FT and enter it for a prize.
But hold on... The bureaucrats in Greece, Portugal, Spain and Italy have made the hard choices. Austerity in these countries is happening (maybe not enough, but it's already painful). Whether it will work long-term or not, I don't know. There's Germany talking about ceding come of its sovereignty to the EU. There's other negotiations happening with the hopes of reforming the EU so that it survives. I just don't see that the problem is the Europeans refusing to get stuff done. It's that the decisions have to be made by committee and the process is very slow. It's so slow that the patient might just expire on the operating table, while the doctors are discussing the best way to proceed. So I am just curious about what other "hard decisions" you want made by which bureaucrats? And yes, Ed, I agree that it is a growth problem. The issue is, unfortunately, is that the lack of growth itself, right at this particular moment in time, is a debt problem, above and beyond the underlying structural issues. Until all the parties involved decide on who's going to to pay and who's gonna take a haircut, everyone's gonna be stuffing cash under the mattress and there will be no growth.
Austerity can work but it needs to be combined with very loose monetary policy. You avoid the rising debt to GDP ratios by having nominal GDP grow a lot But the ECB seems too committed to impoverish the nations they have control of the printing press
No, printing press wont work it would destroy the Euro and the common area economies just the same. It is the same as default but worse. I said the GDP was a lousy growth metric and I see you don't understand that becuase you assume you can raise GDP through monetary inflation and demand stimulus. You can do that with nominal GDP but you don't really grow and you destroy your continuing access to credit just the same as if you default. With no new money coming in and simply printing of Euro's to make common area sovereign loans you would end up with a destroyed (Hyperinflated Currency), which would destroy common area fixed asset values. The problem with using GDP as a growth metric is that it is actually a spending metric. The only part of GDP that is related to real growth is the 'investment' componant. The consumption componant is not a growth measure. The government spending componant is not a growth measure. Using debt or monetary inflation to increase consumption and government spending at the expense of investment is the opposite of growth. The reason that Europe has a growth proplem is because the ration of the 'investment componant' to GDP, Investment/GDP, has been declining for 50 years. Compare the investment/GDP in Germany with the investment/GDP of Italy over the past 50 years and you will see how Italy went flat. Consider that the investment/GDP ratio in China today is about 45%....in the U.S. it is about 15%....in the 1950's the U.S. investment/GDP used to be about 55%. Europe does not need to reduce its debt/Nominal GDP....it needs to increase its Investment/GDP.
Just saw a joint statement by Merkel, Sarkozy, and Monti go by on the newswire. Not resulting in the usual 1 - 2 PM ramp, though. Oh well, so much for that...